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July 1996 Volume 6, No. 7
IN THIS ISSUE
MICROENTERPRISE LENDING
Can Microlenders Survive?
LITERATURE REVIEWS
Contraception: The Morning After
Telephones in The High Country
ORGANIZATIONS
Development Finance Network
Assisting Women Entrepreneurs
VITA PROJECTS
Helping Haiti During The Embargo
ANNOUNCEMENTS
Development and The Environment
Microcredit Summit Preparatory Meeting
* * *
DevelopNet News is published monthly by Volunteers in Technical
Assistance (VITA) in Arlington, Virginia, USA. For additional
information, please see the end of this newsletter.
* * *
M i c r o e n t e r p r i s e L e n d i n g
CAN MICROLENDERS SURVIVE?
The poor countries of the world urgently need small businesses and micro
enterprises for economic development. They are needed because thriving
microenterprise sectors generate new economic activity, create jobs, and
increase incomes. These activities especially raise the economic level
of such underserved groups as the very poor and women. This is the rea-
son development organizations and planners (many of them "donors" who
underwrite development projects) have encouraged microlenders to reach
out to underserved populations.
In the last few decades, as the microloan system grew and developed all
over the world, planners believed that lenders would need constant infu-
sions of cash from donors in order to stay afloat. But now the financial
climate has changed, with widespread shortages of such funds. To meet
the long-term needs of borrowers, donors and lenders must institutional-
ize the resources, advice, and services offered by lenders. Above all,
lenders must become self-sufficient. Says Maria Otero, associate direc-
tor of Accion International, "financial self-sufficiency is a prerequi-
site for making . . . services widely available to microentrepreneurs."
Defining Self-sufficiency
What is self-sufficiency, and how is it achieved? In the microenterprise
system, it is the goal as the lender works to cover more and more of the
costs of lending and become free of the continuous infusion of donor
funds. In this process the lender, very much like any business trying to
survive, first covers its operating costs to a point where net profits
result; the lender becomes commercially self-sufficient. Well-known,
indigenous programs that have achieved a high degree of self-sufficiency
include the private-sector Grameen Bank in Bangladesh and the public-
sector Badan Kredit Kecamatan in Indonesia.
When a lender starts up, it is not uncommon to "spend a dollar to lend a
dollar." But conventional cash accounting doesn't tell the whole story.
In early stages, the lender is still working to create economic activity
and helping to create an entrepreneurial culture, activities that cannot
be measured entirely in dollars.
Moving Toward Self-Sufficiency
When we study programs that have become successful, we see that lenders
themselves have followed good business practices. They have adopted a
market perspective that understands the preferences of the client group
and designs products to meet them. They also recognize the effect that
interest rates, savings, and the ability to leverage capital locally can
have on the long-term health of the lender, the borrowers, and the eco-
nomy at large.
Maria Otero of Accion International (Cambridge, Massachusetts) and
Elizabeth Rhyne of the U.S. Agency for International Development say
that the following principles are essential to the effective delivery of
financial services.
Provide Short-term Working Credit
Studies in developing countries found that borrowers' greatest need was
for short-term loans in small amounts. Commercial banks, as mainstream
financial institutions, were unable to respond to this need because the
methods they used to safeguard the quality of their loan portfolios were
too expensive. They employed credit checks, project appraisals and
required formal collateral -- techniques that are incompatible with the
reality of the microenterprise sector in which entrepreneurs have no
established credit ratings, often do not keep records, and lack market-
able collateral. To be successful, where the formal financial sector has
failed, microenterprise programs must be able to quickly and efficiently
provide their clients with short-term financing in small amounts.
Use Real Interest Rates
Lenders now offer interest rates that undercut the often usurious rates
of the commercial marketplace, rates that exclude most poor borrowers.
How can microlenders afford to be so generous?
Programs further along the path to success charge effective interest
rates that are high enough to cover all of their costs including the
cost of capital fully adjusted for inflation. Accion International's
program in the Dominican Republic, for example, charges nominal rates of
up to 72% -- effective real rates of up to 67% -- without any collection
problems or any noticeable decrease in the demand for its services.
Can poor microentrepreneurs afford to pay rates higher than what banks
charge? In fact, borrowers are rather interest-rate insensitive, since
they value access to credit more than the price of the credit itself.
This is true because of the nature of their enterprises. Despite modest
revenues, small businesses often have high turnover of inventory, high
margins, and low costs resulting in high return on assets. In general
they have no access to commercial banks, however, because of the rigid
collateral and security requirements in the formal sector. Therefore
they end up taking in working capital -- inventory and raw materials --
voraciously from suppliers at implied rates of interest many times the
rates required to earn a micro finance lender an attractive return on
equity. This cost of this credit in kind if annualized can be hundreds
of percentage points per year. In Chad, for example, small merchants pay
as much as 100% in 30 days or 1,200% per year to take goods on consign-
ment from a wholesaler. It is clear that micro lenders can serve bor-
rowers, charge an interest rate high enough to survive, cover their
operating costs, and grow.
Reduce Operating and Administrative Costs
If their operating costs are too high, lenders may never be able to
achieve self-sufficiency.
It is not enough to reduce staffing and physical overhead expenses. Such
remedies do not produce lasting effects. Lenders must increase their
efficiency as well as achieve economies of scale in operations.
Increased efficiency comes from improvements, even if they are marginal,
in a program's loan processes and computerization of management informa-
tion, as well as improved financial management. A lender can begin by
speeding up loan disbursements and minimizing the collection of unneces-
sary borrower data.
Motivate Repayment
For continued self-sufficiency, lenders must ensure good rates of loan
repayment. In commercial banking, a borrower tries to avoid penalties
for late payment or nonpayment, additional fees, seizure of assets, or
the refusal of credit in the future. But microenterprises do not gener-
ally own readily salable assets that can be seized, and increasing
screening and record-keeping would only serve to prohibitively increase
program administrative costs.
One of the best ways of getting around the issue of collateral while
keeping costs low is to utilize group guarantees, where groups of three
or more members undertake to be jointly responsible for a loan. Group
dynamics can generate the discipline and repayment predictability needed
because group members understand that if one of them does not repay the
loan, others' access to credit may be jeopardized. Another method used
to motivate repayments is the promise of larger repeat loans.
Source: Vicki Tsiliopoulos <mailto:vickit@vita.org>.
L i t e r a t u r e R e v i e w s
CONTRACEPTION: THE MORNING AFTER
Charlotte Ellertson, 1996. "History and Efficacy of Emergency Contracep-
tion: Beyond Coca Cola." Family Planning Perspectives, volume 28, No. 2
(March / April), pages 44-48.
The 1994 International Conference on Population and Development in Cairo
affirmed the right of women to control the number and timing of their
pregnancies. Thus, the Conference endorsed the needs of women throughout
the world for access to a broad range of contraceptives as well as safe
abortion services.
Most contraceptives are intended for use at the time of intercourse, but
some methods can be used within a short time after unprotected inter-
course. Several such approaches to "emergency contraception" are now
available and seem safe and effective. (U.S. callers to a toll-free
telephone number, 800-584-9911, can anonymously obtain information
including names of clinicians in their areas.)
The best-studied method originated with Albert Yuzpe (then of the Uni-
versity of Western Ontario, London, Canada) and is widely used in North
America and Europe, but its details vary widely in developing countries.
Various modifications are found in Latin America and China, and the
World Health Organization is conducting multinational studies. Users
take hormone pills orally. Because the concept of efficacy is poorly
defined, the computed failure rate of the Yuzpe method ranges from 0.2%
to 2%, but Ellertson (Population Council, New York) says, "These results
do not account for the fact that some of the women would not have become
pregnant even if they had not used the method." More careful analyses
have shown that it reduces the chances of pregnancy by about 75%.
Enhanced public distribution through such novel delivery systems as ven-
ding machines has been mentioned but not studied. Side effects of the
Yuzpe method are acceptable to women and although more research on why
it works is needed, there is a "compelling case for expanding emergency
contraception at once, if efficacy and safety considerations are the
sole criteria." The chief remaining obstacle to their expanded use "may
well be ignorance."
TELEPHONES IN THE HIGH COUNTRY
Roberto Oltmann, 1995. "Answer in the Altiplanos." Siemens Review
(Munich, Germany), volume 62, no. 6 (November / December), pages 12-17.
The half-million llama herders and other persons in the high country of
Argentina, near the Chilean border, wondered whether they would ever get
telephone service to the outside world. Thousands of families now have
phone service, thanks to the construction by Siemens S.A. (Buenos Aires)
of a chain of high-altitude, digital relay stations. Some of the sites
were high enough (5,000 meters) to cause altitude sickness among new
arrivals to the work areas, and when autumn came, night temperatures
dropped to -20 degrees C. The highest relay station in the world, on
Cerro Esperanza (4,902 m) is among those built to span inaccessible
mountain areas. But Siemens, the multinational enterprise, was able to
announce that the 14 repeater stations were finished in only four
months.
The parabolic reflectors can project radio beams 126 km. The directional
radios were designed and built by the Siemens factory in Milan, Italy.
The bandwidth in the 7.4 GHz frequency range offers a capacity of 3 X 34
Mbits / s, corresponding to 480 to 1,440 simultaneous telephone calls.
The system is now owned and operated by Telecom Argentina.
O r g a n i z a t i o n s
DEVELOPMENT FINANCE NETWORK
DFN is designed to enhance communication among researchers, donor offi-
cials, practitioners, and policymakers who are interested in financial
markets, especially in low-income or in formerly centrally-planned econ-
omies. The Network is sponsored by the Rural Finance Program at The
Ohio State University and the Marketing and Credit Services Office of
the UN Food and Agriculture Organization in Rome.
DFN's objectives include the announcement of meetings, seminars, and
conferences that may be of interest to finance practitioners; to provide
information on new publications and financial practices and policies; to
alert subscribers about ongoing research; and to allow them to debate
and exchange questions and answers about development finance. To sub-
scribe, send a message to: <mailto:listserver@lists.acs.ohio-state.edu>. (Leave
the Subject area blank.) The message is: SUB DEVFINANCE (type your name
without parentheses).
Information: Rural Finance Program (c/o Claudio Gonzalez-Vega), The
Ohio State University, 2120 Fyffe Road, Columbus, Ohio, 43210. Fax:
614-292-7362, e-mail <mailto:clgonzal@magnus.acs.ohio-state.edu>.
ASSISTING WOMEN ENTREPRENEURS
Women's World Banking is a global not-for-profit institution established
in 1979 that aims to promote the involvement of women in creating busi-
ness enterprises. Through more than 50 international affiliates it
assists millions of poor women entrepreneurs. In some 40 countries where
it works it strives to get governmental, bank and business policies,
practices, and attitudes to recognize the importance of women entrepre-
neurs. It also works to create innovative practices, new relationships
and effective systems to improve women's access to banking services,
markets and information.
Information: Women's World Banking, 8 West 40th Street, New York, New
York 10018; tel. +1 (212) 768-8513; fax +1 (212) 768-8519; e-mail
mailto:<wwb@igc.apc.org>.
V I T A P r o j e c t s
HELPING HAITI DURING THE EMBARGO
Several times, VITA's Disaster Information Center has been involved in
nontraditional disaster information activities. Consider recent events
in Haiti. In May 1994 the UN Sanctions Committee imposed certain
restrictions on humanitarian aid to Haiti. Nongovernmental organizations
in the United States grew frustrated by the complex formalities of
transporting material aid. Many nongovernmental organizations wished for
a central coordination point that could provide guidance and facilitate
their work.
In response to these concerns, the U.S. Agency for International Devel-
opment recognized VITA as the contact point for the NGO community. In
particular, we at VITA helped the NGOs to get the clearances and licen-
ses they needed for humanitarian assistance to Haiti. We developed and
distributed current information resources for use by U.S. government
agencies and offices of the U.S. Congress. We also surveyed organiza-
tions on their current and planned activities, needs, and problems in
providing humanitarian aid to Haiti. In addition, VITA provided liaison
between relief agencies and involved U.S. and UN agencies. By maintain-
ing regular contact with these agencies, we could provide accurate
information to requestors, and monitor the progress of applications. As
we learned more about assistance to Haiti, we were able to provide
guidance to organizations requiring additional help with their Haiti
programs.
A large, international health organization chartered flights for its
humanitarian relief. The program manager says: "Much of the credit for
the success of the program goes to VITA. The cooperation and support
they provided was invaluable [and] . . . greatly reduced the Haiti task
force work load."
The relief community sent us a large volume of inquiries, so VITA held
regular information meetings on behalf of the U.S. AID's Haiti Desk and
Haiti Task Force. These information meetings, often attended by the
agency's Haiti mission director, Larry Crandall, provided an informal
forum for many relief agencies and individuals to discuss their con-
cerns. The meetings were so successful that VITA was asked to host two
meetings on behalf of the World Bank's Haiti Division, so that relief
agencies could discuss concerns related to Bank programs and funding
opportunities in Haiti.
Not surprisingly, VITA became a resource for Haitian-Americans inter-
ested in returning to Haiti to help rebuild the country and its economy.
In 1995 VITA was asked by U.S. AID to develop, maintain and promote a
Haiti Skills Bank; we completed this assignment early in 1996. The Haiti
Skills Bank included resumes of nearly 2,000 professionals with a wide
range of expertise.
Although VITA's Haiti project officially concluded when the UN embargo
was lifted, the Disaster Information Center continues to provide inform-
ation on the transport of relief supplies through its established chan-
nels. And another meeting of NGO officers with those of U.S. AID is
scheduled to take place early this month.
Since 1988, VITA's Disaster Information Center has provided U.S. public
and private voluntary organizations with information on international
disaster relief activities and relief commodity transport services.
Thousands of individuals, as well as embassies, corporations, and relief
agencies, have come to rely on the Center as a source of up-to-date
disaster information. The Center receives support from U.S. AID and the
International Business Machines Corporation.
Source: Suzanne Brooks <mailto:sbrooks@vita.org>.
A n n o u n c e m e n t s
DEVELOPMENT AND THE ENVIRONMENT
Starting 2 September the Department of Civil and Environmental Engineer-
ing of the University of Southampton (United Kingdom) will conduct an
intensive three-week training course on Development and the Environment.
The course covers the use of environment-aware procedures in the stages
of a project cycle from project identification to sustained operation.
Thus, it is of interest to senior planners, engineers, agriculturalists
and, indeed, any persons concerned with or involved in the planning,
implementation, and operation of projects for development. The course
includes the following topics: environmental impact assessment, environ-
mental legislation and policies, environmental cost-benefit analysis,
degradation and conservation, and geographical information systems.
Information: The Course Administrator, Development and the Environment,
Institute of Irrigation and Development Studies, University of
Southampton, Southampton SO17 1BJ, U.K.; tel. +44 (1703) 593728; fax +44
(1703) 677519; e-mail <mailto:dso@soton.ac.uk>.
MICROCREDIT SUMMIT PREPARATORY MEETING
In preparation for the Microcredit Summit to be held in Washington,
D.C., next February, a meeting will be held in the same city 20 and 21
September 1996. This is the second preparatory meeting for the Summit.
It will provide the Microcredit Summit Organizing Committee with infor-
mation and insights for the final draft of the Summit Declaration and
Plan of Action. Plenary sessions will focus on business planning for
institutional capacity, commercial finance and microcredit, and building
full financial services for the poor. Persons wishing to attend the pre-
paratory meeting must register by 1 September. Since the space is limi-
ted to 600 participants, registration will be on a first-come-first-
serve basis.
The Summit will meet from 2 to 4 February 1997. It aims to bring
together all those interested in dramatically expanding the reach of
microcredit and other financial services to the world's poorest fami-
lies. The goal is to reach 100 million of such families, especially the
women, with credit for self-employment by 2005. The Summit will define a
strategy for all players involved in microenterprise support -- public,
private, or nonprofit -- to accomplish this goal within the decade.
Information: The Microcredit Summit Secretariat, c/o Results Educational
Fund, 236 Massachusetts Avenue NE, Suite 300, Washington, DC 20002; tel.
+1 (202) 546-1900, fax +1 (202) 546-3228, e-mail
mailto:<microcreditsum@action.org>.
* * *
HOW TO JOIN VITA'S ELECTRONIC FORUM
VITA's free, public, online discussion forum, DEVEL-L, provides for the
exchange of ideas and information on a wide range of issues and topics
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* * *
DevelopNet News is an electronic newsletter published monthly by Volun-
teers in Technical Assistance (VITA), a private, nonprofit, interna-
tional development organization located in Arlington, Virginia. The
newsletter needs your stories: you are invited to send them to the edi-
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President: Henry R. Norman <mailto:hnorman@vita.org>
Editor: Vicki Tsiliopoulos <mailto:vickit@vita.org>
Editorial Assistant: Rafe Ronkin, VITA Volunteer <mailto:rronkin@vita.org>
VITA specializes in information dissemination and communications tech-
nology. It offers services related to sustainable agriculture, food
processing, renewable energy applications, water sanitation and supply,
small enterprise development, and information management. It has pro-
jects in 6 African countries.
VITA's publications, on a variety of practical subjects, are designed to
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